Farouk Systems Wins $300 Million Damages Award Against On-Line Chinese Counterfeiting Ring

On October 14, 2010, the U.S. District Court for the Southern District of Texas granted what is reportedly the largest judgment ever awarded in an action involving on-line counterfeiting. In Farouk Systems, Inc. v. Eyou Int’l Trading Co., Judge Kenneth M. Hoyt entered a default judgment and permanent injunction against more than seventy defendants, who were operating an Internet counterfeiting ring out of China. The judgment required that each of the defendants pay Farouk statutory damages of $4 million, resulting in an award of approximately $300 million. In addition to being significant because of the amount of the damages awarded, this decision is noteworthy for the pragmatic approach that the Court took to ensure that the relief awarded to the plaintiff would be meaningful.

In Farouk, the Court found the defendants guilty of operating an on-line counterfeiting ring that distributed spurious CHI® and FAROUK® branded hair care products, including straightening irons and hairdryers. Judge Hoyt noted that the defendants had gone to “great lengths to conceal and/or move themselves and their ill-gotten proceeds from Plaintiff’s and [the] Court’s detection and reach, including by using multiple false identities and addresses associated with their operations and purposely-deceptive contact information.” To give teeth to the decision, Judge Hoyt required that PayPal, Inc. release money in the defendants’ PayPal accounts to Farouk, in partial payment of the judgment. He also enjoined a broad array of third parties from providing services that would assist any defendant with its infringing activities. Among those enjoined are Internet Service Providers, sponsored search engine and ad word providers, banks, payment processing services, and entities such as Alibaba.com and DIYtrade.com, which provide on-line B2B (business to business) selling platforms.

Judge Hoyt also ordered that twenty-five domain names incorporating the CHI mark be transferred to Farouk. There were another ten domain names used by the counterfeit ring that did not include any of Farouk’s trademarks. Nonetheless, the Court ordered that those domain names be immediately disabled by their respective registrars, and ultimately transferred to Farouk.

This decision illustrates the benefits of creatively constructing requests for relief. When dealing with on-line counterfeit rings, the defendants’ true identities are typically hidden through a web of false company and personal names. Consequently, plaintiffs who win monetary damages are often unable to collect them. In addition to seeking traditional forms of relief, any plaintiff in an on-line counterfeiting dispute should also consider requesting the types of relief awarded in Farouk, which create obligations for — and seize assets held by — third parties that are within the court’s grasp.

Catherine M.C. Farrelly, a former Director in the Gibbons Intellectual Property Department, authored this post.
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